As I’ve stated before, I believe our stock market is overvalued. Then you ask why for the most part does it continue to grow except for the minor corrections??? The answer is liquidity. Liquidity is the creating of paper money to excess. A year ago at a meeting I had with the chief analyst for the Federal Reserve Atlanta, he said that they continue to put money into the system as some of it is absorbed and disappears. I saw an example of that a number of years ago on a trip to South America. South Americans would love to get US dollar bills as a way to save. They would hide them in their mattress and let their countries excess inflation rate make that dollar bill grow by double or in some cases triple digit growth. Much more than they could ever get from a bank.

Printing a little excess dollar bills fills this absorption but printing a lot creates bubbles such as real estate, the stock market, etc. That is what is happening not only here in the US but internationally. Printing excess paper eventually shows up as inflation and the devaluing of that countries paper money. Anyone who has traveled outside the US knows first hand how much the value of the dollar has dropped. Is there more to come? Here is an excerpt from and article by Dan Amoss. If you want the complete article let me know.

PAPER MONEY IS A CLAIM ON WEALTH
by Dan Amoss, CFA

Paper money is popular under democracies. Under the control of a central bank, paper money provides modern economies with the illusion of great flexibility and resilience. Without the rigidity of the gold standard, bad bank loans are easily swept under the rug. This prevents the possibility of setting a Depression-era bank failure into motion.

Contrary to popular opinion, paper money is not wealth. Paper money is a claim on wealth. It only has value to the extent that it can be exchanged for things — a bushel of corn, a gallon of gasoline, a dental cleaning, or an Intel microprocessor.

When the government prints more money, it gives a public fixated on asset prices the illusion that they are growing wealthier, when, in fact, they are growing poorer. As paper money becomes more and more plentiful, the producers of valuable products will eventually demand more units of money in exchange for their product or service.

Daily celebrations of new Dow records fail to recognize the inflation behind this index’s move upward. Dr. Marc Faber is on public record talking about a potential “Dow 100,000” scenario. This scenario is possible if current trends continue. But we must remember that under this scenario, the price of everything will be increasing dramatically, leading to lower living standards.

Food Is Wealth, Pesos Are Not

A stark example of consumer price inflation leading to declining living standards is the recent tripling of corn tortilla prices in Mexico. Protesters have marched on Mexico City, demanding that the government do something about it.

Mexico ’s fairly socialist economy has produced a situation in which many citizens’ incomes rely heavily on the government’s entitlement spending. Mexican monetary policy must remain loose to keep the system afloat. The supply of pesos in circulation has been growing 15-20% over the past year.

Misjudging the root cause of tortilla price increases — an exploding money supply — populist politicians have blamed “monopolistic” tortilla companies like Grupo Gruma and have enacted price controls that will only worsen the future supply picture.

Once the stage for easy pesos was set, the final catalyst that sparked the Mexican tortilla price explosion was the U.S. government’s boneheaded policy of subsidizing corn-based ethanol. Demand from dozens of new ethanol plants has stretched the U.S. corn market to its limit. High corn prices have attracted all excess supply away from international markets, causing a shortage in Mexico’s regular imports from the U.S.

Paper money inflation is not confined to Mexico. Loose U.S. monetary policies and ethanol subsidies are combining to form a future perfect storm in the price of basic food ingredients. Those holding their breath for imminent Fed rate cuts will probably have to hold it beyond this year’s corn harvest.

The average Mexican citizen facing spiraling food costs doesn’t seem to care about housing prices or rallies in the Mexican stock exchange. Will Americans be facing this situation at some point in the future?
Ethanol will also affect our cost of food. Just one more thing for you to think about.


Robert Matheson
Matheson Financial Services
239-403-8727

Matheson Financial Services
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Robert Matheson, Registered Investment Advisor, CPA*, CFP®, CEPP
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The information and data contained herein has been obtained from sources believed reliable, but is in no way guaranteed by Robert Matheson or Matheson Financial Services as to its accuracy.  Furthermore, this report is provided as a complimentary service by Robert Matheson and is not a solicitation, or an offer to buy or sell any security, mutual fund, commodity or any other product mentioned in this or any other report.  Past performance does not guarantee future results.